The Securities and Exchange Board of India (“SEBI”) on March 8, 2024 rolled out critical updates to the SEBI (Real Estate Investment Trust) Regulations, 2014 (“REIT Regulations”).These modifications mark the debut of small and medium real estate investment trusts (“SMREIT(s)”) in the REIT Regulations (“SMREIT Regulations”), a strategy designed to widen the range of real estate investment possibilities in India.
The SMREIT Regulations follow close heel to the consultation paper issued by SEBI in May 2023 (“Consultation Paper”), marking SEBI’s initial foray into regulating fractional ownership platforms (“FPO(s)”) within India. I offer a succinct and insightful overview of the key distinctions and similarities between the recommendations made by SEBI in the Consultation Paper and the finalized SMREIT Regulations:
| Particulars | Consultation Paper released by SEBI
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SMREIT Regulations |
| Parties to the Real Estate Investment Trust | The entities engaged in the SMREIT involve sponsor, trustee and investment manager. | The concept of sponsor has been done away with and the investment manager is now required to undertake the role and functions attached to the office of the sponsor and the investment manager.
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| Eligibility criteria for investment managers | Investment managers were required to have a net worth of INR 10 crore.
The investment managers were required to have 5 years’ prior experience in real estate fund management or advisory services in the real estate industry. |
The net worth requirement has been increased to 20 crores, since the investment manager will step into the shoes of the sponsor.
The required experience for investment managers has been reduced from 5 years to 2 years prior experience in the real estate industry or real estate fund management.
A significant addition to the regulations, designed to broaden access for a greater number of investment managers, is the provision allowing investment managers who may not meet the aforementioned criteria themselves to hire at least 2 key management personnel who do satisfy these requirements and thus qualify to become an investment manager.
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| Lock in | The sponsor shall be required to hold a minimum of 15% percent of the total units of the SMREIT for each scheme for a period of at least 3 years from the date of listing of such units. | The lock in period proposed under the REIT Regulations is as follows:
In case the scheme is not leveraged: 0-3 years: at least 5% of total outstanding units for 3 years;
In case the scheme is leveraged:
Ø 0-3rd year- 15% of the total outstanding units Ø 4th-5th year- 3% of the total outstanding units Ø 6th-10th year- 2% of the total outstanding Ø 11th-20th year– 1% of the total outstanding Ø After completion of 20th year– 1% of the total outstanding
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| Key Conditions of Offer | Ø The minimum subscription size of each unit shall be INR 10 lakhs.
Ø At least 95% of the schemes of AUM to be invested in completed and rent generating properties at all times. Ø SMREIT may raise funds from any investor, resident or foreign. Ø SMREIT shall not be allowed to raise debt. |
While the regulations incorporate the key conditions of offer set out in the Consultation Paper, the regulations also propose the following additional conditions:
Ø no unit holder of the scheme of the SMREIT shall enjoy superior voting or any other rights over another unit holder in the same scheme. Ø there cannot be multiple classes of units of scheme of the SMREIT. Ø The offer document cannot contain statements which promise or guarantee assured returns or increase in profits or yields. Ø Investment manager and trustee to ensure assets of each scheme are ringfenced and segregated. Ø Property documents evidencing title to be maintained in safe deposit boxes with scheduled commercial banks.
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| Valuation of Assets | Ø Valuation of assets of each scheme was required to be undertaken on a quarterly basis.
Ø If a property was proposed to be purchased or sold at value which is greater than 102% / less than 98% of the value of property as assessed by the valuer respectively, approval from unitholders shall be required wherein votes cast in favour of the resolution shall be at least 3 times the number of votes cast, against the resolution. |
Ø Valuation of assets of each scheme to be undertaken on an annual basis.
Ø In case of material development having an impact on the assets valuation to be undertaken within 2 months from date of event.
Ø No valuer undertakes valuation of the properties of the schemes of the SMREIT for more than 4 years consecutively.
Ø If a property was proposed to be purchased or sold at value which is greater than 105% / less than 95% of the value of property as assessed by the valuer respectively, approval from unitholders shall be required wherein votes cast in favour of the resolution shall be at least 3 times the number of votes cast, against the resolution.
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| Migration of existing structures | — | Application for migration to the current framework to be made by existing FPOs within 6 months from the date of the said regulations coming into force (i.e. from March 8, 2024).
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| Rights of Investors | Ø The investors to have the right to remove the investment manager, auditor, principal valuer, and/or seek winding up of the scheme.
Ø Annual meeting of Investor mandatory wherein matters such as latest annual accounts, valuation reports, performance of the scheme are to be taken up and discussed.
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In addition to the rights in the Consultation Paper, Investors are provided a bouquet of rights for their protection:
Ø Annual meeting of Investors to be held at least 1 time every year within 120 days from end of each financial year;
Ø Matters such as undertaking borrowing beyond a specified limit any change in investment strategy, or delisting of a scheme, any issue of units after initial offer of scheme, any transaction value of which is equal to or greater than 10% of the value of the property require prior approval of the Investors. |
In a nutshell these regulatory amendments are poised to alter the landscape of the FPO industry in India. It is anticipated that there will be a surge in market participation and in broadening of investment avenues. It will be exciting to see the manner in which FPOs will traverse through this regulatory landscape and capitalise on the newfound opportunities.
Author: Vedika Shah, Senior Associate at Pioneer Legal. Views are personal.
Disclaimer: This article is meant for informational purpose only and does not purport to be advice or opinion, legal or otherwise, whatsoever. Pioneer Legal does not intend to advertise its services through this article.